Mexico - Electric Power Project

RESTRICTED. FILE CXY No. P-28 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the LOAN APPLICATION of COMISION FEDERAL DE ELECTRICIDAD and NACIONAL FINANCIERA, S.A. of MEXICO December 28, 1951  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECO1h.IENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE LOAN APPLICATION OF COMISION FEDEPAL DE ELECTRICIDAD AND NACIONAL FINANCIERj_ S,A, 1. I submit the following report and recommendations on the applica- tion of Comision Federal de Electricidad ("CFE") and Nacional Financiera, S.A. (fFinanciera") for a long-term loan of $29,700,000 to finance the for- eign exchange costs of a program of expansion of electric pover generation, transmission and distribution facilitie$ to be carried out by CFE. PART I v' HISTORICAL 2. On January 6, 1949, the Bank made a loan of 424,100,000 to CFE and Financiera to finance part of the cost oi an electric po'ier expansion program begun by CFE in 1947 and due to be completed in 1952. Generally satisfactory progress has been made in carrying out this program, and CFE has for some time been planning the further expansion of electric power facilit.es which vill be necessary to meet the estimated increase of demand over the next five to eight years. 3. In December 1950, CFE asked the Bank to consider financing this second stage of expansion. I informed the Mexican authorities that I would be unable to recommend that the Bank should ponsider financing this program unless they gave an undertaking not to avail themselves of the WO million line of credit opened in their iavor by the Export-Import Bank in Ootober 195O, to the extent of any loan that the Bank mnight be vwlling to make. An undertaking to this effect was given by the Mexican Secretary of Finance in a letter to the Bank dated October 15). 19519, 4. Formal negotiations for a loan began on December 11, 1951. CFE was represented by its Director-General, Mr# A. Paez, and Financiera by its WJashington representative, Mr. A. Cortina$ Financial Counselor of the MJexican Embassy. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrowers 5. The Borrowers would be Comision Federal de Electricidad and Nacional Financiera, S.A. 6. Comision Federal de Electricidad is an autoncmous government agency established by a lavw of August 14, 1937, now superseded by a law of January ,11 19L9, for the purpose of organizing and directing a.national system for the generation, transmission and distribution of electrical energy.  2- 7. Nacional Financiera, S.A. is a corporation established by law of June 30, 1934, to finance the development of lMexican industry. In 1947, by resolution of the Mexican Congress, it was designated the sole agency for the negotiation and administration of external loans on behalf of the Mexican Government. For this reason, the obligations under the proposed loan would be assumed jointly and severally by Financiera and CFE. Guarantor 8. The United Mexican States, through the intermediary of Financiera, would fully guarantee the obligations of the borrowers under the Loan Agree- ment. Legislation has been enacted specifically authorizing Financiera to give the guarantee of the Hexican Government to loans from the International Bahk in an amount more than sufficient to cover the proposed loan. Amount 9. The loan would be in the amount of U.S. $29,700,000, or its equi- valent in other currencies. Purpose 10. The proceeds of the loan would be used to finance foreign exchange expenditures on account of a specific construction program to be carried out by CFE for'the expansion of its electric power generation, transmission and distribution facilities in Mexico. Term and Amortization Arrangements 11. The loan would be for a period of 25 years. Amortization of the $13.8 million of the loan assigned to the Tingambato project (see Technical Report) would begin an August 1, 1956, and amortization of the remainder a year earlier. Amortization of both portions would be on the basis of level payments calculated to retire the loan by its maturity on February 1, 1977. Interest and Commitment Charge 12. The loan would bear interest at the rate of 4t per annum (in- cluding the usual commission at the rate of 1% per annum). A commitment charge would be payable on the undisbursed 'portion of the loan in accord- ance with the Bankfs current practice.  -3- Legal Instruments 13. (i) Attached hereto are drafts of the following legal instru- ments: (a) A Loan Agreement between the Bank and OFE and Financiera; (b) A Guarantee Agreement between the United Mexican States and the Bank. (ii) There is attacHed hereto, as Annex A, the report of the Committee provided fcr in Article III, Section 4 (iii) of the Articles of Agreement of the Bank. 14. The draft Loan and Guarantee Agreements are in the shortened form made possible by the acceptance of Loan Regulations No. 4. They do not differ substantially from those used for the first CFE loan except, of course, in that the consultation clause does not appear in the Guarantee Agreement. Attention may be drawn to the following points in the Loan Agreement; (a) If an Event of Default on the first loan occurred, it would premature the second loan (Article VI); (b) Under Section 5.09(d), CFE would not be permitted, with- out the consent of the Bank, to dispose of all, or sub- stantially all, of the property included in any of the projects, unless it first redeemed the portion of the loan outstanding in respect of that project (not, as in .the previous Loan Agreement, the whole amount of the loan outstanding); (c) In Section 2.02, withdrawals for three of the projecta would be made subject to compliance with certain tech- nical conditions; (d) Section 5.01 requires the projects to be designed by engineers or engineering firms qualified by experience of similar work. SecuritZ and Debt Limitation 15, The borrower has not been required to provide any specific security. The Loan and Guarantee Agreements contain the usual negative pledge covenants. Section 5.04 of the Loan Agreement would restrain CFE from incurring addi- tional debt without the Bank's consent if, as a result, the total service charges on all its indebtedness in any year would amount to more than 66 2/3% of its total revenues (excluding Federal.Government appropriations) during a period of any twelve consecutive months out of the fifteen months preoeding the date on which CFE proposed to incur such additional debt. Actually CFE  - 4- is not at present in a position to incur additional debt without the Bank's consent, and will not be for some years to come. For the purposes of Section 5.04, debt of less than one year in term would be excluded to the extent of 25 million pesos. In view of the greatly expanded scale of CFE's operations, this figure is thought more appropriate than the 10 million pesos limit applied in the earlier Loan Agreement, which would be amended accordingly. PART III - APPRAISAL OF THE PROPOSED LOAN The Projects 16. An appraisal of the projects and o$-CFE1s financial position is given in the Technical Report (L-149-a) circulated herewith. 17. The projects relate in part to areas, such as Mexico City and Monterrey, where industrial development has tended to out-run the supply of power, and in part to areas, such as Lower California and Yucatan, as yet relatively undeveloped, where the provision of power may be expected to give a strong stimulus to agricultural and industrial development. The Tingambato and Sonora projects are logical extensions of projects financed by the Bank under the previous loan. In view of the difficult U.S. supply situation, it is worthy of note that CFE believes that it may be able to spend up to 75% of the proceeds of the loan in Canada and Europe. 18. I believe that adequate electric power is of key importance if the industrial and agricultural development essential to the support of Mlexicols rapidly increasing population is to be maintained, and that the projects now presented form a well-balanced selection which would make an important con- tribution 'to the Mexican economy. The Capacity to Repay 19. The account of CFEts finances given in the Technical Report shows that, during the next few years, CFEtp revenues, which arise chiefly from the sale of power and from the 10% electricity tax, will have to be supple- mented from other sources if the planned rate of construction and service on CFE1s debt are to be maintained. These other sources will normally con- sist principally of Federal Government appropriations. Section 5.04 of the Loan Agreement, which would restrict CFEls power to incur debt without the Bank's consent, would safeguard the Bank, should occasion arise, against any tendency on the part of CFE to rely on fresh borrowing for funds which, in the Bank's opinion, it would be better to obtain from government appropria- tions. 20. The Technical Report gives estimates showing that the net revenue from each of the.Projeqts should cover the service of the corresponding por- tion of the loan with a substantial margin to spare. 21. For some months i Joint Working Party of Bank and ilexican economists has been studying Mexico's economic position with special reference to Mexico's capacity to absorb additional external investment. The Working  -5- Party's report is not yet available, but the Bank economists have told me that the report will indicate that lMexicots economic progress has-been main- tained, and that its creditworthiness has improved over the last year. 22. In view of the undertaking given by the i1exican authorities (see paragraph 3) not to avail themselves of the $150 million Export Import Bank line of credit to the extent of this loan, or of other loans which the Bank might be willing to make,. I am confident that the service of the proposed loan would be well within the capacity of the JAexican economy.. 23. I am therefore satisfied that due regard has been paid to the prospects that the Borrowers and the Guarantor will be in a position to meet their respective obligations under the proposed loan,.and I am satis- fied that, in making this loan, the Bank would be acting prudently in the interests both of Mlexico and of the members of the Bank as a whole. PART IV - COMPLIANCE WITH THE ARTICIES OF &GREEMET 24. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART V - RECOrTMENDAT IONS 25. I recommend that the Bank at this time grant to Comision Federal de Electricidad and Nacional Financiera, S.A., a loan of $29,700 000 for a term of twenty-five years, with interest (including commissionS and com_ mitment charge at such rates, and on such other terms as are specified in the forms of Loan and Guarantee Agreements attached hereto. Eugene R. Black President Washington, D. C. December 28 , 1951